The defendant first argues the court should dismiss the complaint because the claims asserted in the second state court action were not potentially covered under the title insurance policy and, thus, it did not have a duty to defend. An insurer's duty to defend is broader than the duty to indemnify. State Farm v. Eddy, 218 Cal. App. 3d 958, 965, 267 Cal. Rptr. 379 (1990). The duty to defend is measured at the outset of the litigation and arises only when the facts alleged "give rise to a potentially covered claim." Devin v. United Svcs. Auto Assn., 6 Cal. App. 4th 1149, 1157 (1992). If the claims asserted against the insured are not potentially covered under the policy, the insurer has no duty to defend. Keating v. National Union, 995 F.2d 154, 156 (9th Cir. 1993).

The court finds the claims asserted by Somerset against the insured in the second state court action were not potentially covered under the title insurance policy and, consequently, American Title did not have a duty to defend the insured. The claims asserted against the insured in the underlying action were premised upon allegations that the insured made tortious misrepresentations. Somerset brought a tort action against the insured based on the insured's misrepresentations rather than a defect in title. If the insured had not made the alleged misrepresentation, Somerset would not have viable tort claims against the insured. Although asked directly by the court during oral argument, counsel for the plaintiff was unable to identify the claim asserted against the insured which triggered the duty to defend.

The insurer does not represent expressly or impliedly that the title is as set forth in the policy; it merely agrees that, and the insured only expects that, the insurer will pay for any losses resulting from, or he will cause the removal of, a cloud on the insured's title within the policy provisions. . . .

Accordingly, when the contingency insured against under the policy occurs, the title insurer is not, by that fact alone, liable to the insured for damages in contract or tort, but rather, is obligated to indemnify the insured under the terms of the policy.

Lawrence, 192 Cal. App. 3d at 75. Thus, the plaintiff could not have pursued a claim against the insured based solely on the existence of the title insurance policy. Instead, the action was based on the alleged tortious conduct of the insured. A review of the title insurance policy reveals such a claim is not potentially covered under the policy. Consequently, American Title had no duty to defend the claims asserted against the insured.

Further, any loss suffered by the insured, as a consequence of the resulting stipulated judgment, was a result of the alleged misrepresentations. The court, therefore, grants American Title's motion to dismiss.

In the alternative, on the breach of the implied covenant of good faith and fair dealing claim, the court dismisses this claim. The court finds the assignment from the insured to the plaintiff of the breach of the implied covenant claim is not valid.

Recent California case law holds that a judgment against the insured is a condition precedent to the insured's right to assign a cause of action for bad faith against the insurer. Smith v. State Farm, 5 Cal. App. 4th 1104, 1114 (1992). The Smith court held a stipulated judgment with a covenant not to execute will not bind the insurer because "it does not represent a recovery that will trigger a duty to indemnify, that is, a recovery imposing liability." Id. The court reasoned the "covenant not to execute shields the insured from such liability." Id.

The court found certain risks were introduced by these assignments, which override the policies of encouraging settlements and equalizing an insured's bargaining power. First, the court discussed California Evidence Code Section 1155, which prohibits evidence of insurance coverage in actions to recover damages for personal injuries. The court feared a prejudgment assignment could violate this rule because the issue of the insured's liability and insurance coverage could be combined in a single action. The court next noted a prejudgment assignment could remove the issue of the insured's liability from the adversarial context by presenting the insured as an ally of the claimant. Finally, the court feared prejudgment assignments could unfairly prejudice excess insurers.

In the present case, the insured and the plaintiff entered into a stipulated judgment and the insured obtained a covenant not to execute. The stipulated judgment consisted of $ 100,000, plus attorney's fees in the amount of $ 30,736.37, and costs of $ 755.25, for a total sum of $ 131,491.62. Thus, the situation presented in Smith is present because the insured is shielded from any liability which would trigger the duty to indemnify. The court, therefore, finds the assignment of the breach of the implied covenant claim is not valid.

The cases cited by the plaintiff are distinguishable. The Ninth Circuit case cited was decided prior to the Smith decision. Consolidated American v. Mike Soper Marine, 951 F.2d 186 (9th Cir. 1991). In Xebec Development v. National Union, 12 Cal. App. 4th 501 (1993), the court held the prejudgment assignment of the breach of contract claim was valid, but distinguished an assignment of a claim for breach of the implied covenant of good faith and fair dealing. Id. at 527. The court did not reach the issue whether Smith would prohibit the assignment of the breach of the implied covenant claim. Id. at 570-71.

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